Falling demand for tyres caused by the slowdown in the US coupled with the debt crisis in Europe has forced tyre companies to slash production by up to 15%. There is, however, cautious optimism that the tyre industry will grow steadily in the coming years thanks to an expanding market in India, China and Indonesia
The looming economic crisis in the US and Europe threatens to adversely affect the global tyre industry by bringing down demand, curtailing exports and raising import costs. Tyre producers are reported to have reduced production by about 15% on account of demand recession.
Apart from demand from carmakers being flat, aftermarket (tyre replacements) sales have also come down as customers are deferring purchases on a poor market sentiment. Demand for commercial vehicles is not as bad, though even their sales growth has moderated to single digits. Though some softening has happened in natural rubber prices, the cost of other input materials like carbon, fabric and synthetic rubber have not come down as yet.
The positive revenue growths shown by the European tyre manufacturers in their recently declared Q3 results reveal that there has been not much dip in tyre sales in the US and European markets as of now. The Goodyear Tire & Rubber Co, for instance, reported a 22% rise in revenue for the third quarter of 2011 which, the company said, was the highest revenue for any quarter in its history.
Michelin and Titan International Inc. posted 10.6 % and 79 % rise in sales respectively during the quarter. The Indian tyre major MRF registered over 30 % growth in revenue during the year ended September 30, 2011, making it the first Indian tyre company to cross the Rs 100,000- million mark in total revenue.
However, recent developments concerning the future of the Euro currency and the stability of global financial markets have cast serious doubt as to how the international tyre industry will fare in the second half of 2011 and beyond.
Impact on tyre prices
Tyre prices are expected to remain steady for the next few months as demand from the auto market slows and the cost of natural rubber drops. However, if the rupee devalues significantly and imports become expensive, the tyre companies may take a call on product prices, according to tyre industry sources. Nearly all major tyre makers such as Apollo, JK Tyre and Ceat had increased product prices by 8-10% over three-four tranches in this year itself.
Price of natural rubber (RSS 4) in the Indian market came down to Rs 196 a kg (price on November 9, 2011), from a peak of around Rs 245 a kg a few months ago. The industry would be more comfortable if prices were to come down to Rs 180-190 a kg. The industry hopes that a demand recession in Europe, the second largest rubber consumer after China with annual consumption of one million tonnes of NR, may cause the prices to fall further. However, the fall in supplies due to heavy floods in Thailand, the largest producer of natural rubber, is a cause for concern for the tyre industry.
The first signs of impact of the current global financial crisis have begun to show in Sri Lanka. Manufacturers have slowed down production in the wake of decline in demand. Rubber prices have been on the decline since the last week of October in the Colombo auctions ending a period of high prices driven by global demand originating mainly from China and India.
Coping with recession
Rubber Asia talked to the exhibitors and visitors to the Rubber Expo 2011 held in Cleveland, OH, USA, on the likely impact of recession on the tyre industry.
Their observations regarding the effect of the recession could be easily categorised into the following three categories: Not affected by recession (health care suppliers); somewhat positive (recyclers and used machinery suppliers) and negatively impacted (the rest of the industry).
The recession period was used by all to “rightsize” (read downsize) their operations, to make productivity gains and, in some instances, to form strategic alliances. During the recession, lower sales of new machines are balanced by higher sales of used equipment, especially to the developing regions of South America, Eastern Europe and Asia.
Tyre companies are paying greater attention to Budget tyres to meet fall in demand. In financially difficult times, consumers in
Europe and the UK usually look for cheap imported brands from the Far East. Enterprising wholesalers and distributors in both Europe and the UK who offer their own ‘Private Brands’ also enjoy increasing sales performance as tyre retailers look to purchase alternative ‘lower priced’ tyres to meet their customer’s reduced budget levels.
The car (PCR) market is reportedly fairing better than the truck market in Europe at the moment because car tyres cannot be legally driven on reaching below 1.6mm of tread and most drivers do not want to risk being prosecuted for ‘bald’ tyres. Therefore, reluctantly they will replace worn tyres.
The year 2009 was the worst period of economic downturn for the tyre companies in the UK and Europe when an estimated 11.4% market decline took place. However, recent analysis indicates that in 2010 the market began to recover in the UK with growth reaching around 12.6%. It is also considered that the European market recovered at roughly the same rate. During 2010, there was a significant amount of legislative changes introduced such as EU labelling, noise reduction and tyre pressure monitoring system regulations making this growth all the more encouraging.
Official facts and figures for this year are not yet available but it is generally considered that the European and UK markets have continued to improve. Independent forecasts still predict a continued (if slight) improvement. The tyre companies in the UK and Europe too share the optimism that the complicated ‘world of finance’ will eventually sort itself out and the anticipated market improvement will happen.
“The slowing global economy has not significantly affected the tyre industry. There is still the market in India, China and Indonesia. Despite global strains, the tyre industry will continue to grow steadily over the next five years,” says Peter W C Tan, Managing Director, Goodyear Orient Co.Ltd.
With inputs from Rubber Asia correspondents John Stone in UK, Louis Rumao in the US, Prof Piyasiri A.J.Yapa in Sri Lanka and Sharad Matade in Mumbai.